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Tata's guarantees to Port Talbot only last for another five years

As news of the signing of the memorandum of understanding came out, union leaders and politicians were quick to call on Tata to give assurances that it would stick to its commitments on jobs and investments at Port Talbot and its other UK operations.

Those commitments are:

not to seek compulsory redundancies for five years;

to keep two blast furnaces operating at Port Talbot for at least five years;

to invest £100m a year over 10 years in UK steel operations, dependent on the business achieving Ebitda (earnings before tax, interest, debt and amortisation) of £200m a year.

Crucially the first two commitments only extend until 2021-22. It means that beyond that date the joint venture is free to look at Port Talbot again.

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Analysts believe one of Port Talbot's blast furnaces could be mothballed in five years

In fact we know from what Tata and ThyssenKrupp said earlier this week that the two companies plan to review their production network in 2020.

What will happen in that review is uncertain, but market analysts from Royal Bank of Canada (RBC) expect it to include reducing capacity in upstream steel production, especially in Port Talbot.

This week's announcement from Tata and ThyssenKrupp talked about achieving cost savings of up to £530m by 2020.

This would be achieved by integrating the two companies sales and administration arms, optimising procurement and logistics, joint R&D and improving their downstream steel processing.

Together these rationalisations are expected to lead to the loss of 4,000 jobs - although German steel workers protesting in Bochum today expect the true figure could be higher.

Whatever the truth of that, further savings beyond 2020 will have to come from the upstream production network, hence the review of that part of the business scheduled for that year. That puts Port Talbot in the firing line.

RBC Capital Markets expects the joint venture to be seeking savings of more than £220m after 2020. It believes one of Port Talbot's blast furnaces will be shut down after 2021.

Port Talbot is the smallest of the merged operation's steelmaking plants

Tata steelworks in Port Talbot

That would leave Port Talbot as the smallest of the joint venture's three major production sites by some margin.

The biggest is Duisburg in Germany, with a workforce of 14,000 and output of 12 million tonnes a year.

IJmuiden in the Netherlands is next, producing 7 million tonnes a year with a workforce of 9,000.

Port Talbot is half the size of IJmuiden, with an output of 3.5 million tonnes produced by 4,000 steel workers.

If Port Talbot's output is reduced after 2021, it would further diminish the plant's weight within the joint venture's production structure.

This could potentially make it more vulnerable to further rationalisation in the longer term.

Uncertainty clouds the long-term view with Brexit on the horizon

What is the likelihood of that? It all depends on the performance of the joint venture in the uncertain steel market.

On the plus side, the world is not going to stop needing steel. A combination of strong economic growth and effective tariffs against Chinese steel imports could see good times for European steel makers.

On the other hand, if growth is weaker and tariffs have little effect, then the business could once again become vulnerable to falling prices with renewed pressure to cut costs.

Throwing a wild card into the equation is the uncertainty about Brexit.

Unless Britain joins some sort of common tariff arrangement with the EU, it will have to erect its own protection against Chinese imports.

This is the context in which Port Talbot's performance will be measured against IJmuiden and Duisburg.

Redundancy laws in Germany and Holland make job cuts there expensive

German steelworkers protest against the merger between Tata and ThyssenKrupp (Image: Getty Images Europe)

German steelworkers took to the streets in their thousands today to protest against the merger, with one trade union leader accusing ThyssenKrupp of failing to take account of employee's interests.

The strength of feeling suggests that the deal faces a rocky ride from workers' representatives who fill half the places on the company's supervisory board.

Port Talbot workers can take some reassurance from the fact that Tata is pledged not to seek compulsory redundancies for five years.

Longer term though their job security may depend on other factors such as the cost and expense of laying off workers in the different countries.

Both Germany and the Netherlands have stronger worker protection than UK law, with complicated requirements to demonstrate the need for redundancies and do a social profile of the workforce.

If the steel market is weak and the joint venture is in the position of looking for more cost savings in five years' time, it will also have to weigh up other factors.

Does the proximity of Duisburg and IJmiuden (they are only 125 miles apart and connected by waterways) mean it makes sense to focus production on them? If Port Talbot is closed, what will be the costs of remediation and who will meet them?

The merger probably represents the best hope for Port Talbot in the short to medium term. In the longer term, there are no guarantees.